International business has changed considerably in the past several decades. Just as new forms of businesses have emerged over the years, new ways of doing business have also evolved. Accompanying these new developments are new issues as well. A more contentious business type that is fast becoming a catchphrase within legal and financial circles is the offshore company.

Whilst the formation of offshore companies is not actually a novel concept, today’s offshore companies differ largely in function, if not in form. At their most basic, offshore companies are businesses incorporated outside the primary or original country of operations of the company. This definition would include all multinational companies in existence.

However, seldom would multinationals refer to themselves as offshore companies. The term nowadays is generally reserved for a subset of out-of-country business operations. Specifically, offshore corporations are found mostly in territories known as offshore jurisdictions or offshore financial centers.

Location of Offshore Companies

It is often said that the success of any business depends on its location. For offshore companies, the location most preferred for their incorporation is within offshore financial centers which are characteristically tax competitive regimes. The low-tax feature of offshore jurisdictions is undoubtedly the single most important determinant for forming offshore companies these days.

Although traditionally known as tax havens, many offshore centers are trying to alienate themselves from the term. This is because the label “tax haven” since the early 2000’s has been associated with tax evasion and questionable tax mitigation schemes.

Tax avoidance is primarily the main motivation for offshore company formation. Usually, what is sought by owners of offshore companies is the low to non-existent personal income tax as well as the nominal corporate tax rates offered – anywhere from 0% to 10%.

There are also a number of offshore jurisdictions that do not levy capital gains tax and inheritance tax. There are those that also provide other tax exemptions for foreign corporations.

This reduced taxation may amount to very substantial savings for offshore companies engaged in the acquisition and transfer of various assets. As a matter of fact, it is in this “tax liberal” context that professional financial planners argue in favor of offshore company formation in countries that do not impose such taxation.

Simplicity of Offshore Companies

Forming certain offshore companies in offshore financial centers is markedly less difficult than incorporating within ones country of residence. Of course, this is not applicable for businesses that require a prior local license as demanded by legislation in the offshore jurisdiction.

Nevertheless, since offshore companies mostly act as holding companies or trusts, setting one up is quite easy. Many offshore company formation services exist, particularly on the Internet, where one can be assisted for a minimal fee to have an offshore company incorporated on your behalf in under a week.

There are even offshore companies that already exist which can be bought “off the shelf”, so to speak. These "shelf" companies, however, are less common and are commonly regarded as high risk since their history may be more of a liability to the prospective company owner than a benefit.

Related to the effortlessness of offshore company formation is the relatively low maintenance requirements for operating an offshore company. In many offshore jurisdictions, reportorial duties are almost non-existent. If reporting is performed at all, nominee directors can fulfill such requirements.

Flexibility Of Offshore Companies

Once an offshore company is in place, it may perform a wide variety of powerful functions. A particular form of offshore company, the International Business Company (IBC), may not engage in local business activity in the offshore jurisdiction where it is incorporated. Other than that, IBCs, like any other offshore company, may do just about everything else allowed of offshore companies.

Offshore companies may engage in international trading, investment of funds, acquisition and disposal of assets, being a vehicle for asset protection and holding other businesses and companies among many other things. Each purpose has its pros and cons, finance-wise, depending on the intended goal for the offshore company as well as the particular business environment provided by the offshore center.

Offshore Companies and Privacy

Lastly, offshore companies enjoy a greater level of anonymity and privacy. This is afforded by strict banking laws as well as the aforementioned simplified reportorial requirements.

Although recent developments point towards the adoption of an international tax standard that would tend to lift the so-called corporate veil, information regarding offshore companies is still considered strictly confidential. Any requests for access to information are subject to terms of international treaties and are provided only for investigated cases of tax evasion, terrorist funding or money laundering.